2023 results fall short of our expectations

The company announced its 2023 results: revenue of 3.06 billion yuan, -22.5% YoY; net profit to mother of 159 million yuan, -24.8% YoY. The company's 2023 performance fell short of our expectations, mainly due to impairment charges and fee rate increases exceeding our expectations.

Demand in the industry is weak, and sales and revenue of new admixture materials are under pressure. In 2023, the company sold 1.35 million tons of new admixture materials, -2.2% year-on-year, and revenue of new admixture materials was 2.24 billion yuan, -11% year-on-year. The gross margin bucked the trend, and the market share increased steadily. In 2023, the company's comprehensive gross profit margin was 24.8%, of which the gross profit margin for new admixtures was 24.2%, +1.8ppt year on year; the gross profit margin for technical services was 32.6%, -1.0ppt year on year. According to the company's estimates, the company's market share for new admixture materials was about 10% in 2023, +0.2ppt. Against the backdrop of overall headwinds in the industry, the company is still steadily increasing its market share. The overall cost rate increased. In 2023, the company's sales/management/R&D expense ratio was 6.7%/5.0%/5.6%, compared with +1.8ppt /+1.0ppt. Against the backdrop of declining sales revenue, the overall cost ratio increased, which greatly suppressed profits. Repayments remained steady, and net operating cash flow increased. The company's net operating cash flow in 2023 was $437 million, +4.13% year over year. Overall repayments remained steady throughout the year against the backdrop of declining profits and declining downstream payment capacity. Depreciation pressure is still prominent, dragging down profits. In 2023, the company accrued credit impairment losses of about $556 million and asset impairment losses of about $39.9 million, mainly due to impairment of accounts receivable and contract assets. The company's total impairment was slightly narrower than in '22, but it still had a significant impact on profits.

Development trends

The scale of the testing business is expected to expand. At the end of 2023, Jianyan Testing, a subsidiary of the company, obtained authorized laboratory qualifications from Celis Automobile and Dongfeng Liuqi, and became a third-party laboratory authorized by the above two companies. In the future, it can provide testing, data and reporting services to its electronic component suppliers nationwide. In 2023, Jianyan Testing Group's comprehensive technical service business developed steadily, achieving operating revenue of 421 million yuan and net profit of 17.578 million yuan. We believe that the scale of the company's testing business is expected to expand.

Profit forecasting and valuation

As the downward pressure on demand exceeded expectations, we lowered the company's 2024E net profit of 43.9% to 162 million yuan and introduced 2025E net profit of 182 million yuan. The current stock price corresponds to 2024/25E17.0x/15.2x P/E. We maintain our outperforming industry rating. Considering the continued consolidation of the company's market position, we only lowered the target price by 28.6% to 5 yuan, corresponding to 2024/25E 22.0x/19.6x P/E, implying 29% upward space.

risks

The recovery in demand fell short of expectations, and competition in the industry intensified.